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In re Ion Media Networks, Inc., 419 B.R. 585, 52 Bankr.Ct.Dec. 140

Facts

Cyrus Select Opportunities Master Fund Ltd. purchased second lien debt of ION Media Networks, Inc. and challenged the rights of first lien lenders to recover value attributed to the debtors' FCC broadcast licenses. The intercreditor agreement explicitly acknowledged the priority of first lien lenders and restricted second lien lenders from contesting that priority. Despite these restrictions, Cyrus objected to the confirmation of ION's reorganization plan, arguing that the FCC licenses were unencumbered and should be available for recovery by second lien lenders.

Cyrus Select Opportunities Master Fund Ltd. ('Cyrus') is an activist distressed investor that purchased certain deeply discounted second lien debt of ION Media Networks, Inc. ('ION,' together with its affiliated debtors, the 'Debtors') for pennies on the dollar. Throughout these cases and despite purported restrictions on its activities set forth in an intercreditor agreement (the 'Intercreditor Agreement') between the first lien lenders (the 'First Lien Lenders') and the subordinated second lien lenders (the 'Second Lien Lenders,' and, together with the First Lien Lenders, the 'Secured Parties'), Cyrus has been vigorously challenging the rights of the First Lien Lenders to recover as secured creditors any of the enterprise value attributable to ION's FCC broadcast licenses (the 'FCC Licenses').

Issue

Whether Cyrus, as a second lien lender, had standing to object to the confirmation of ION's Chapter 11 reorganization plan given the restrictions imposed by the intercreditor agreement.

The question presented is whether Cyrus, which admits to being subject to the Intercreditor Agreement, may blithely disregard the restrictions of that agreement and openly oppose an otherwise consensual plan of reorganization simply by saying that the FCC Licenses are not covered by the agreement.

Rule

The intercreditor agreement prohibits second lien lenders from challenging the priority of first lien lenders' claims and from opposing any plan of reorganization that is consistent with the rights of the first lien lenders.

The Intercreditor Agreement expressly prohibits Cyrus from arguing that the FCC Licenses are unencumbered and that the First Lien Lenders' claims against the FCC License Subsidiaries are therefore unsecured.

Analysis

The court determined that the FCC licenses constituted 'purported' collateral under the intercreditor agreement, which precluded Cyrus from objecting to the plan. The court emphasized that the intercreditor agreement was enforceable and that Cyrus's objections were in direct violation of its terms. The plan was found to respect the rights of the first lien lenders and was confirmable despite Cyrus's claims.

Here, a sophisticated, economically motivated and woefully out of the money creditor has deliberately chosen to ignore the terms of an unambiguous agreement that, read literally, precludes it from opposing confirmation. This is a high risk strategy that is being implemented without first obtaining a declaration of rights under the Intercreditor Agreement.

Conclusion

The court confirmed ION's reorganization plan, overruling Cyrus's objections and finding that the plan complied with all necessary legal standards.

The objections of Cyrus to confirmation are overruled. The Plan respects the rights of the First Lien Lenders as recognized in the Intercreditor Agreement and is confirmable.

Who won?

ION Media Networks, Inc. prevailed as the court confirmed its reorganization plan, affirming the priority of the first lien lenders as established in the intercreditor agreement.

Cyrus has been willful in its treatment of the Intercreditor Agreement as inapplicable to it simply on the basis of its own untested theory as to what does and does not fall within the definition of Collateral.

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